Select Committee on European Scrutiny Twenty-First Report


COM(01) 213

Draft Directive on the supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate and amending Directives 73/239/EEC, 79/267/EEC, 92/49/EEC, 92/96/EEC, 93/6/EEC, 93/22/EEC, 98/78/EC and 2000/12/EC.

Legal base:Article 47(2) EC; consultation; qualified majority voting
Department:HM Treasury
Basis of consideration: Minister's letter of 18 February 2002
Previous Committee Report: HC 152­ix (2001­02), paragraph 1(5 December 2001)
To be discussed in Council: Early 2002
Committee's assessment:Legally and politically important
Committee's decision:Cleared


  8.1  Under the present regulatory regime, financial institutions such as credit institutions, investment firms and insurance companies are regulated under specific sectoral directives. The rules which apply to these groups do not, however, specifically address groups which combine the services of investment firms, banks and insurance companies. The result is a limited framework for the supervision of such financial institutions. In particular, gaps exist in that certain types of financial group are not covered by the existing directives, and important rules on prudential matters which cover firms subject to the sectoral directives do not cover financial conglomerates.[14] There are also overlaps under the present system in that inconsistencies arise in the treatment of similar prudential questions, and the same financial group can be covered by different sectoral directives.

  8.2  A regulatory framework for financial conglomerates has been identified as a priority under the Financial Services Action Plan. In December, we left uncleared a document that would introduce comprehensive rules for the supervision of financial conglomerates. We requested further information on the proposed treatment of third country financial conglomerates and on the effects, if any, of the Directive on the operation of the Financial Services and Markets Act 2000.

The Minister's letter of 18 February 2002

  8.3  As regards the proposed treatment of third country financial conglomerates, the Economic Secretary to the Treasury (Ruth Kelly) says that the Government's commitment to preserve the UK's central role in financial markets was underlined in the earlier Explanatory Memorandum and adds:

    "As currently drafted, the Directive proposes that credit institutions, insurance companies and financial institutions in the EU, which are part of a group which is headed by a firm which is outside the EU (3rd country groups), are covered by the Directive. Consolidated supervision of these groups will ensure that risks to financial stability are addressed as these risks are not limited by EU boundaries. In particular, the Directive proposes that national competent authorities consider whether the supervision of such groups is equivalent to consolidated supervision carried out in the EU. The current lack of consolidated supervision in the US raises concerns about the impact of the directive on US firms operating in the UK."

  8.4  As regards the effects, if any, of the Directive on the operation of the Financial Services and Markets Act 200, the Minister says:

    "the Explanatory Memorandum also emphasised that 'it will be essential to ensure that the terms of the directive, as finally agreed, do not undermine or constrain the operation of the Financial Services and Markets Act. My purpose in drawing attention to this was to underline the Government's continuing commitment to the terms of the Act and to signal that as discussions on the directive get underway, the new FSMA regime will need to be borne closely in mind in the course of negotiation through the Council Working Group and debates in the European Parliament.

    "There is, in fact, no reason to expect that the directive will constrain or undermine FSMA. As with many EU financial services directives, we need to be aware of the interaction between this directive and FSMA.

    "You will understand that until it is ready for adoption the Directive's final form cannot be foreseen; that stage may not be reached for many months and there may be further changes to the text. I will inform you and your Committee if changes emerged which either materially constrained or undermined FSMA or could undermine the UK position as a key financial sector, because of the proposed treatment to third country groups."


  8.5  In our earlier report, we noted that the Directive would fill gaps in the current regulatory framework and reduce overlaps and inconsistencies, but agreed with the Government that the Directive must be flexible, proportionate and effective. We thank the Minister for the further information and her undertaking to inform us about changes made to the text during negotiations.

  8.6  We clear the document.

14  The document gives the example of the elimination of multiple gearing of regulatory capital, that is, the same capital being counted twice over and used simultaneously as a buffer against risk in different entities in the same financial conglomerate. Back

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Prepared 26 March 2002